Beyond productivity: How AI creates value in private equity

The private equity and broader investment community faces an acute AI paradox: despite widespread adoption and accelerating investment, companies are struggling to convert deployment into measurable financial returns. As of late 2025, nearly 90 percent of companies had deployed generative or agentic AI in at least one business function, yet 94 percent of respondents reported failing to capture "significant" value from those investments. This performance gap echoes the "Solow Paradox," which economist Robert Solow articulated decades ago regarding the visibility of computing technology in productivity statistics—a phenomenon now repeating with artificial intelligence.

McKinsey's analysis identifies a fundamental misalignment in how organizations approach AI value creation. The prevailing focus on incremental productivity improvements—using AI to enhance existing processes and automate isolated tasks—represents a limited strategy unlikely to expand profit pools or deliver durable competitive advantage. This occurs because productivity gains in commoditized functions erode through competition, ultimately benefiting customers through lower prices rather than bolstering the implementing firm's margins. The real value creation lever lies in leveraging AI to reshape business offerings, reconfigure value chains, and fundamentally alter business models in ways that expand or reallocate profit pools.

For private equity specifically, research indicates AI can materially reshape portfolio company EBITDA trajectories and improve capital efficiency when approached strategically. Rather than treating AI as a productivity tool sprinkled across disconnected workflows, successful implementations require comprehensive workflow re-engineering and firm-level orchestration of AI capabilities. This includes embedding AI-driven diligence capabilities into acquisition processes and developing scalable, repeatable methodologies for portfolio value creation.

The historical precedent suggests the transformation is only beginning. Revolutionary technologies such as railroads, electricity, and computers created value through multiple waves: initial productivity enhancements established foothold adoption, but sustained economic impact emerged when entirely new products, business models, and competitive structures emerged—often redistributing value significantly across industry participants. Private equity firms positioning themselves to compete effectively will need to move beyond pilot programs and foundational investments toward systematic integration of generative AI into strategic value creation frameworks, understanding that competitive advantage flows not from automation advantage but from business model innovation.